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CARES Act’s Delayed Provisions Could Go the Way of Cadillac Tax

Posted on June 5, 2020

The most recent bill out of Congress modifying and extending the Paycheck Protection Program (PPP) is likely to be the first of many legislative efforts to soften the requirements for coronavirus relief provisions.

As Congress continues to expand and cement the relief program's benefits, like the PPP's forgivable loans or the employer-side payroll tax deferral provision, it will become harder for lawmakers to justify enforcing its rules on the back end that could put taxpayers out of business, according to William G. Gale of the Brookings Institution.

The Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010), which the Senate passed by unanimous consent June 3 after the House passed it May 28 on a 417-1 vote, extended the PPP loan forgiveness period from eight weeks to 24 weeks and lowered the threshold for the amount of loan money required to be spent on payroll.

“Essentially, what they were doing is taking a hard constraint that they had put in the budget and now deferring it or delaying it,” Gale said on a June 4 National Association for Business Economics webinar, adding that he wouldn’t be surprised to see lawmakers ease the PPP guidelines even further.

PPP participants can have their loans forgiven entirely if they abide by specific rules. Those that aren't eligible for loan forgiveness will be required to pay back their loans in full.

Once those loans start coming due next year, Congress will be under a lot of pressure to extend due dates or expand the rules for forgiveness, and the same mind-set will likely apply to deferred payroll taxes that will be due in coming years, Gale said. At that point, both programs would likely end up much like the Cadillac tax on high-cost healthcare plans or the medical device excise tax, which both were extended multiple times before finally being repealed, he said.

“I find it hard to think that Congress will say to firms at the end of the year, ‘You have to pay this money now,’ even if it means they go out of business after all they did to keep firms in business during the downturn,” Gale said.

Like Before, but Different

When Congress enacted the PPP and its companion provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), lawmakers were looking to provide short-term liquidity relief to cash-constrained individuals and small businesses because they were operating under the assumption that the economic shock would be significant but temporary, said Keith Hennessey, a professor at Stanford University’s Graduate School of Business.

But the bill that Congress just passed to expand the PPP suggests the program is evolving with a new purpose, according to Hennessey. “What I saw in the PPP was an attempt to help workers . . . not an attempt to help the small business owners and the businesses themselves. The businesses were, in effect, a passthrough” for the program’s benefits, he said.

“Now they’ve redefined it to give business owners more flexibility, to use the money to help with liquidity relief for the businesses, which is a different purpose,” Hennessey said. “Maybe you think it’s a good purpose, maybe you don’t, but it’s fundamentally different,” he added.

Gale agreed that policymakers will have to modify their approach to providing relief as the crisis stretches on. “There was this view originally that the economy would take a staycation for a month and then everything would go back to normal, and in that world, the PPP made a lot of sense,” he said. But policymakers will now have to weigh how they want to provide relief versus stimulus, he said.

The big question is how long the pandemic will last, Hennessey said. For policymakers who view the pandemic as being largely in the rearview mirror, it makes sense to simply extend the current programs to “buy yourself through the remainder of the liquidity problems until the economy has time to recover,” he said. But if a second wave of COVID-19 hits, policymakers will want to avoid stimulus and continue to focus on relief that enables the public to abide by public health guidelines.

Jason Furman, a former chair of the White House Council of Economic Advisers, said he is less convinced about the rigid dichotomy between relief and stimulus measures.

During a June 4 webinar hosted by the Urban-Brookings Tax Policy Center, Furman said that providing relief to individuals who wouldn’t otherwise be able to pay for things like food or rent serves a dual purpose of increasing spending while also providing relief. As such, he said he supports extending the CARES Act’s unemployment insurance benefits, albeit at less generous amounts.

Furman said he agrees with proposals from Democrats to expand the earned income tax credit and the child tax credit, but said it would take until next year for those benefits to filter through. As a matter of priorities, lawmakers could better serve those in need by simply increasing Supplemental Nutrition Assistance Program (SNAP) benefits so people would get their money in a matter of weeks, he said.

Furman was more critical than Gale and Hennessey of the PPP, arguing that, while well intentioned, the program doesn’t have a persistent effect, and much of its benefits have gone to successful businesses and have been a windfall for their owners. Furman said he opposes the CARES Act’s $300 above-the-line charitable deduction, which he said would do nothing to boost charitable giving.

“It’s just another barnacle on the tax code,” Furman said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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